Global Financial Systemic Risk Is Rising – Again

Credit markets in Europe remain significant underperformers relative to equities this week, despite some short-covering yesterday that narrowed the gap. Global Financial Systemic Risk is rising again – dramatically. It seemed that the dramatic shift from early to mid-week was enough to scare some action back into the market and we can’t help but feel that the rallies in Spanish and Italian govvies (on what was very likely thin trading) was all central banks, all the time. Today saw stocks rally in Europe to new post-NFP highs while credit leaked wider off its open and closed on a weak tone into the US long-weekend. As BNP pointed out this week, the 7 day run wider in European financial credit was one of the largest on record at around 57bps (versus 64bps record) and so some pullback from that run was likely but the lack of follow-through today suggests this was books getting flatter into a decision/headline-heavy weekend as opposed to significant rerisking. EURUSD trod water around 1.3125/50 but AUD weakness spurred a much more risk-off attitude in FX that was not evident in stocks (yet). Treasuries were inching lower in yield as we moved into the European close after extending yesterday losses earlier on (up 2-6bps on the week). European sovereigns ended mixed with most wider since the NFP-pring Friday (Spain +27bps spread to bunds) while Italy managed to recover (-11bps) and Portugal is notably tighter. This week saw very sideways action dominated by the sell-off and rally reversal in Spain and Italy’s pivot securities. As Europe closes, commodities (ex-Oil) are selling off rapidly with Copper the week’s big loser -4%, Silver next – underperforming USD strength, and Gold just in the red on the week at $1720. The end of the week felt much more like covering to flat than any aggressive re- or de-risking which seems appropriate given the rising risk of binary events and an inability to hedge those jumps.